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BoC offers silver lining for low oil prices and loonie

Central bank expects to end 2016 with more stable debt levels and a growing economy

Today’s announcement from the Bank of Canada that it would maintain the overnight target rate at 0.5% could signal business as usual for Canada’s real estate market—another way of saying that home sales will continue be fast and furious in the nation’s two hottest markets, Toronto and Vancouver.

In its Monetary Policy report, the BoC acknowledged that surging house prices continue to be a concern for the nation’s overall economic well-being stating that: “Reductions in the Bank’s policy interest rate in January and July 2015 contributed importantly to these accommodative financial conditions. For example, yields on 5-year Government of Canada bonds are now roughly 80 basis points below their average level in December 2014.”

However, the BoC feels that regulatory changes that impact both consumers and lenders will help to slow lending market activity this year. “Bank funding costs have been edging up more recently, prompting some financial institutions to increase mortgage rates by about 5 to 15 basis points. As a result, effective borrowing rates for households, while still low, have risen slightly since the October [Monetary] Report.”

Impact on buyers and sellers and household debt

For home buyers this means they can still expect the low interest rate environment we’ve become accustomed to throughout 2016, but don’t hold out for a dip in rates below the historically low levels that we experienced in 2015.

But as the year unfolds, the BoC expects the economy to strengthen and for household borrowing rates to “begin to normalize.” This, in turn, will prompt “the housing market and household indebtedness…to stabilize.” At this point, the bank believes the disparity between house prices/consumer debt and household income growth will finally be reduced to less concerning levels.

Low oil prices produce silver lining

In the background of all this rate talk, is the global economic impact of lower oil prices. According to Canada’s central bank, this impact will continue to unfold, but that the negative impact of lower commodity prices on North America’s economy will eventually be balanced out by the positive impact that lower oil prices will have on real income. As such, the BoC states that lower oil prices will have “positive effects on global GDP” in 2016 and 2017, and this uptick in real income will “become dominant” over the next two years and beyond.

This optimistic outlook prompted the BoC to state that gains in income from lower gasolines prices will be beneficial to consumer and to Canada’s economy—with the income gains being used to either “boost current spending or to repay debt or increase savings, thus improving consumers’ ability to spend in future years.”

Low loonie could boost domestic spending

The Bank also addressed concerns about the dropping loonie, stating that since the central bank’s October Monetary Policy report, commodity prices continued to fall and this led to “tighter credit conditions for commodity producers,” which directly impacted the profit margins of oil producers in Canada. This, combined with the relative strength of the U.S. economy, prompted a depreciation of the Canadian dollar, state report authors. But the bank doesn’t appear too concerned, highlighting the fact that the loonie’s current value is more closely reflective of its historic value of 72-cents on the U.S. dollar. Report authors add that the lower loonie may actually help boost domestic spending, which will help to keep consumer spending “in line with disposable income.”

Still, some analysts are worried that the global economy—and, subsequently, Canada’s economy—isn’t growing fast enough. Maclean’s columnist Jason Kirby suggests that the U.S. may actually be in the midst of another recession, while the International Monetary Fund released a report that cut Canada’s economic growth forecast, along with the global forecast.

For CIBC Chief Economist Benjamin Tal all this really means is that the global economy is going through a rebalancing. At a TREB Outlook launch on Monday Jan. 18, Tal stated that “2016 is a transition year—from something bad to something better,” where there is a rebalancing between the earnings of global commodity producers and earnings of global commodity consumers. “What we are seeing is a big transfer of money from producers to consumers.

If this turns out to be true then the BoC’s rosy outlook for Canada’s economic growth may not be so far off, but only time will tell—and that assumes we don’t slam into any black swans along the way.

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